Catastrophe Bonds

THE SECURITIZATION OF INSURANCE RISK: CATASTROPHE BONDS

Catastrophe (cat) bonds are one of a number of innovative risk transfer products that have emerged as an alternative to traditional insurance and reinsurance products. Insurers and reinsurers typically issue cat bonds through a special purpose vehicle, a company set up specifically for this purpose. Cat bonds pay high interest rates and diversify an investor's portfolio because natural disasters occur randomly and are not associated with economic factors. Depending on how the cat bond is structured, if losses reach the threshold specified in the bond offering, the investor may lose all or part of the principal or interest.

Catastrophe bond issuance in 2015, at $5.92 billion, was less than the record high of $7.9 billion in 2014, according to the GC Securities division of MMC Securities Corp. Catastrophe bond issuance was markedly low in the fourth quarter of 2015, in contrast with a record first quarter. Catastrophe bond risk capital outstanding fell slightly to $22.44 billion in 2015, from $22.77 billion in 2014. GC Securities expects in the absence of a major market disruption, issuance in 2016 will be similar to the last several years as new sponsors incorporate alternative capital into their strategies.

Top 10 Catastrophe Bond Transactions, 2015

(US$ millions)

Rank

Special purpose vehicle

Sponsor name

Risk amount

Peril

Risk location

1

Alamo Re Ltd. Series 2015-1

TWIA

$700

Hurricane

Texas

2

Kilimanjaro Re Ltd. Series 2015-1

Everest Re

625

Hurricane and earthquake

U.S.

3

Cranberry Re Ltd. Series 2015-1

MPIUA

300

Hurricane

Massachusetts

4

Acorn Re Ltd. Series 2015-1

Kaiser Permanente

300

Earthquake

U.S. and Mexico

5

Galileo Re Ltd. 2015-1

Catlin

300

Hurricane and earthquake

U.S., Canada, Europe

6

Merna Re Ltd.

State Farm

300

Earthquake

New Madrid

7

Everglades Re II Ltd.

Florida Citizens

300

Hurricane

Florida

8

Long Point Re III Ltd.

Travelers

300

Hurricane and earthquake

U.S.

9

Nakama Re Ltd. 2015-1

Zenkyoren

300

Earthquake

Japan

10

Kizuna Re II Ltd. Series 2015-1

Tokio Marine & Fire

290

Earthquake

Japan

Source: GC Securities, a division of MMC Securities Corp., a U.S. registered broker-dealer, member FINRA/SIPC and Guy Carpenter.